Capital asset pricing model Essays & Research Papers

Best Capital asset pricing model Essays

Running head: PRICING MODELS
Pricing Models
Adam F. Thornton
FIN 501 – 3
TUI University
Dr. William Anderson
Chipotle Mexican Grill (CMG) is one of the fastest growing restaurant chains in the United States. Self proclaimed as “fast-casual,” CMG offers a dining experience that is unique, organic, and which draws from the local economy. For the investor, CMG is a wise investment for the aggressive and fast growing portion of a portfolio. When determining an appropriate...

CAPITAL ASSET PRICING MODEL
The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk [pic]premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).
Using the CAPM model and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the...

Capital Asset Pricing Model
The Capital Asset Pricing Model otherwise know as CAPM defines the relationship between risk and return for individual securities. William Sharpe published the capital asset pricing model in 1964. CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and specific risk. For his work on CAPM, Sharpe shared the 1990 Nobel Prize in Economics with Harry Markowitz and Merton Miller
CAPM assumes the concept of a logical investor,...

Introduction
Economic models are always intended to simplify the real-world complex economic issues and provide efficient information to the users, and such role is taken by Capital Asset Pricing Model (CAPM) as well. The CAPM is the key theory in the stock market and industries; it is widely used by analysts, investors and corporations. In this essay I am going to discuss the recent developments about the CAPM, and refer to both advantages and disadvantages.
Capital Asset Pricing Model
The...

1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning
Undiversifiable (market )risk:
Market risk is the variability in all risky assets caused by macroeconomic variables. This risk cannot be avoided, regardless of the amount of diversification. Systematic risk (Market risk) factors are those macroeconomic variables that...

Chapter 9: Multifactor Models of Risk and Return. (QUESTIONS)
1. Both the capital asset pricing model and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between CAPM and APT. Also, using either of these theories, explain how superior investment performance can be establish.
Answer:
Both the Capital Asset...

Capital Asset Pricing Model (CAPM): Pros and Cons.
CAPM defines the relationship between risk and return. The premise of the model is that the expected investment return varies in direct proportion to its risk, i.e., the riskier the investment - the higher the return you should expect.
Shows:
• how much risk you are taking when investing in an instrument?
• whether the instrument is rightly priced
• whether you are getting sufficient return for the risk you are taking
CAPM calculates...

James D. Lowe
Trident University International
FIN301 - Principles of Finance
Module 3
Case Assignment
Assignment:
1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning
a. There's a substantial unexpected increase in inflation.
b. There's a major recession in the U.S.
c. A major lawsuit is filed against one large publicly traded...

﻿CAPITAL ASSET PRICING MODEL
The Capital Asset Pricing Model deals with independent investor problems that needs to undergo the procedure of selection of securities involving risks. The investors need to select the most advantageous security that produces the best possible outcome. This model deals with the estimation of securities as well as it links the risk and return (the expected shares). There is a direct relationship and risk and return provides higher expected return from that...

CAPITAL ASSET PRICING MODEL (CAPM) The capital asset pricing model (CAPM) is an important model in finance theory. CAPM is a theory or model use to calculate the risk and expected return rate of an investment portfolio (normally refer to stocks or shares). All stocks have 2 risks: Systematic Risk (also called Market Risk which affect every stocks) and Unsystematic Risk (also called Specific or Unique Risk that only affects individual stocks). To diversify unsystematic risk, we selected and...

University of Macau Faculty of Business Administration MFIN604 – Theory of Finance MSc in Finance (Fall 2012/13) Instructor: Prof. Keith Lam (Associate Professor of Finance) Office: L217 (Ext. 4167) Email: keithlam@umac.mo Webpage (intranet): http://personalweb.umac.mo/keithlam Course Objectives The course aims to provide students with solid theoretical frameworks in asset pricing and other fields of finance. For asset pricing, the concepts of risk and return, and state prices will be introduced...

﻿Question (2010/2011 Exam – Q7 (section B)): The Capital Asset Pricing Model holds in economies satisfying a certain set of conditions. State four of these conditions and identify why they are essential for the model to hold (you are not expected to derive the entire model but you must identify the steps in the theory where these conditions play an important role).
Under 7 sets of key assumptions, we know that all agents will hold a particular market portfolio, which consists of the same...

﻿results from its application throughout a narrative literature review. Second the paper has argued that to claim whether the CAPM is dead or alive, some improvements on the model must be considered. Rather than take the view that one theory is right and the other is wrong, it is probably more accurate to say that each applies in somewhat different circumstances (assumptions). Finally it’s argued that even the examination of the CAPM’s variants is unable to solve the debate into the model....

﻿
1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
Answer:
The cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company's equity shares will not drop. This is a consonance with the overall firm's objective of wealth maximization. WACC is a calculation of a firm's cost of capital in which each category of capital is...

Joanna began her calculation of Nike’s WACC by finding the necessary weights of debt and equity to be used. To begin, Joanna found Nike’s debt by combining the book values of current long-term debt, notes payable, and long-term debt, which were all found on Nike’s balance sheet. The values were $5.4 million, $855.3 million, and $435.9 million respectively. This calculation gave Nike a total debt of $1,296.9 million. To find Nike’s equity, Joanna used the book value of total shareholders’...

RISK & CAPITAL ASSET PRICING MODEL | |
|Every financial investment contains some | |To see how the risk matrix (see below) described in this tutorial is used, please |
|level of financial risk. This risk is | |take a look at FinanceIsland's ROI analysis tool. You can try it out
|usually expressed through the discount rate | |by subscribing for a free trial.
|used in the financial analysis. Since the | |...

Introduction
Capital asset pricing has always been an active area in the finance literature. Capital Asset Pricing Model (CAPM) is one of the economic models used to determine the market price for risk and the appropriate measure of risk for a single asset. The CAPM shows that the equilibrium rates of return on all risky assets are function of their covariance with the market portfolio. This theory helps us understand why expected returns change through time. Furthermore, this model is...

A Chartered Financial Analyst, Jeffrey Bruner, uses the Capital Asset Pricing Model (CAPM) to help identify mispriced securities. However, a consultant suggests Bruner to use Arbitrage Pricing Theory (APT) instead. As the following, it will mention the role of CAPM in the modern portfolio management; to clarify the APT faction and explain the reasons why should Bruner use APT to help identify mispriced securities.
In modern portfolio management, the role of Capital Asset Pricing Model (CAPM)...

Compare and contrast CAPM and APT?
Capital asset pricing model (CAPM) and arbitrage pricing theory (APT) are both methods of assessing an investment's risk in relation to its potential reward and whether the potential investment yield is worthwhile.
CAPM developed by Sharpe 1964. The basic theory behind this model is that investor needs to be compensated for Time Value of Money and the risk that they are taking.
The time value of money is represented by the risk-free (rf) rate in...

CHAPTER 10
Return and Risk: The Capital Asset Pricing Model (CAPM)
Multiple Choice Questions
I.
DEFINITIONS
PORTFOLIOS
a
1. A portfolio is:
a. a group of assets, such as stocks and bonds, held as a collective unit by an investor.
b. the expected return on a risky asset.
c. the expected return on a collection of risky assets.
d. the variance of returns for a risky asset.
e. the standard deviation of returns for a collection of risky assets.
Difficulty level: Easy
PORTFOLIO...

CAPM: THEORY, ADVANTAGES, AND DISADVANTAGES
THE CAPITAL ASSET PRICING MODEL RELEVANT TO ACCA QUALIFICATION PAPER F9
Section F of the Study Guide for Paper F9 contains several references to the capital asset pricing model (CAPM). This article is the last in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. The first article, published in the January 2008 issue of student accountant introduced the CAPM and its components, showed how the model can be used to...

High Mountain
To:
David Rogers
From: JMSB Analysis Group
Date: December 2009
Group members:
Jun Gao
Jiaqi Yin
Qing Zhang
Antoine Vulcain
Main issues:
Evaluation of two possible products:
1. NPV of two possible products
2. WACC analysis
--CPAM
--Bond yield plus
Recommendation:
Product B(aircraft) will be suggested due to the situation of the company.
---If there are enough funds for the...

(10 points) Suppose CAPM works, and you know that the expected returns on Walmart and Amazon are estimated to be 12% and 10%, respectively. You have just calculated extremely reliable estimates of the betas of Walmart and Amazon to be 1.30 and 0.90, respectively. Given this data, what is a reasonable estimate of the risk-free rate (the return on a long-term government bond)? (Enter the answer with no more nor less than two decimal places, and leave off the % sign. For example, if your answer is...

﻿Capital Asset Pricing Model
Capital Asset Pricing Model (CAPM)
Capital market theory extends portfolio theory and develops a model for pricing all risky assets. It is an equation that quantifies security risk and defines a risk/return relationship
Capital asset pricing model (CAPM) will allow you to determine the required rate of return for any risky asset
Implications of the CAPM:
CAPM indicates what should be the expected or required rates of return on risky assets
This helps...

CHAPTER 9
THE CAPITAL ASSET PRICING MODEL
9.1 THE CAPITAL ASSET PRICING MODEL
1. The CAPM and its Assumptions
The capital asset pricing model (CAPM) is a set of predictions concerning equilibrium expected re¬turns on risky assets. Harry Markowitz laid down the foundation of modern portfolio man¬agement in 1952. The CAPM was developed 12 years later in articles by William Sharpe (1964), John Lintner (1965), and Jan Mossin (1966). The time for this gestation indicates that the leap...

ECS4080 Corporate Finance & Portfolio Management Coursework Submission Date: 16th January 2009
Instructions:
1. Choose one question to answer from Section A. Answers need to be presented in an essay form.
2. The answer to the essay-type question in Section A should not exceed a 2-sided A4 size paper.
3. Answer all numerical questions in Section B. Show all your calculations.
4. All answers must be typed using font size 12.
5. Hand in your coursework to the student office on or
6....

First draft: August 2003 This draft: January 2004 The Capital Asset Pricing Model: Theory and Evidence∗ Eugene F. Fama and Kenneth R. French
The capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Four decades later, the CAPM is still widely used in applications, such as estimating the cost of capital for firms and evaluating the performance of managed portfolios. It is the...

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Table of Contents
Question # 1a
The finance profession has had difficulty in developing a practical approach to measuring risk premiums and thus investor’s required rate of return , but financial managers most often use a method called the capital asset pricing model (CAPM) .The capital asset pricing model (CAPM) is the standard risk-return model used by most academicians and practitioners. The important concept of CAPM is that investors are rewarded for only that portion of risk...

FINA3080Investment Analysis and Portfolio Analysis
Midterm Examination
Date: March 12, 2013
1. If all investors become more risk averse the SML will _______________ and stock prices will _______________. A. shift upward; riseB. shift downward; fallC. have the same intercept with a steeper slope; fallD. have the same intercept with a flatter slope; rise
2. According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buyB. positive...

The Dichotomous Asset Pricing Model Evidence from the UK market
1. Introduction Ever since its introduction by Sharpe-Lintner-Black, the Capital Asset Pricing Model (CAPM) has been subject to criticism, appraisal and continuous efforts for improvement, such as the Reward Beta approach (Bornholt, 2007), conditional CAPM or the consumption CAPM. The Dichotomous Asset Pricing Model (DAPM), introduced by Professor Liang Zou at the Universiteit van Amsterdam, brings a fresh approach to asset...

Suppose we are in….
The Land of All Assets
The end result of our time spent in the Land of All Assets was that an investor in the Mean-Variance World would complete the following process to construct her or his optimal portfolio: 1) The investor would first estimate the various inputs needed to build the Old Efficient Frontier. The inputs that the investor needs to estimate are the expected returns and the variances of all the risky assets, and all of the covariance terms across all of the...

The dividend growth model approach limited application in practice because of its two assumptions.
It assumes that the dividend per share will grow at a constant rate, g, forever
The expected dividend growth rate, g, should be less than the cost of equity, Ke, to arrive at the simple growth formula.
The growth formula is,
Ke = (DIV1 / Po) + g
These assumptions imply that the dividend growth approach cannot be applied to those companies, which are not paying any dividends, or whose...

CAPM vs. APT
Asset Pricing Model are very useful tools that enable financial annalists or just simply independent investors evaluate the risk in an specific investment and at the same time set a specific rate of return with respect the amount of risk of an individual investment or a portfolio. The CAPM method while simpler than the ATP method takes into consideration the factor of time and does not get too wrapped up over the Systematic risk factors that sometimes we can not control. In this...

Capital Asset Pricing Model - CAPM
[pic]
What Does Capital Asset Pricing Model - CAPM Mean?
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
[pic]
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over...

Student name: Umar Abdullaev
Proposed research topic:
The implication of conditional betas on the Fama-French three factor model
Introduction
CAPM has been an active area of research over the past half century since the introduction of Sharpe development of the capital asset pricing model. Much progress has been made in the early years on the linear relationship between expected return and beta(Black, Jensen and Scholes 1972 and Fama and MacBeth 1973). Later studies however show...

Capital Asset Pricing Model (CAPM) Versus the Discounted Cash Flows Method
Managerial Analysis/BUSN 602
Capital asset pricing model or CAPM is a financial model that measures the risk premium inherent in equity investments like common stocks while Discounted Cash Flow or DCF compares the cost of an investment with the present value of future cash flows generated by the investment with the mindset being that if the cash flow is positive, then the investment is good. Generally speaking, CAPM...

﻿ECONM2035: Asset Pricing
Evarist Stoja (2B7, x10603)
e.stoja@bristol.ac.uk
Outline: This course runs over the autumn term and aims to provide a thorough grounding in the pricing of financial securities. The lectures start with some quantitative review material before moving on to bond pricing. Equity markets and determination of equity prices are treated next before students are introduced to the theory behind and testing procedures for informational efficiency in financial markets....

The Validity of Capital Asset Pricing Model and Factors of Arbitrage Pricing Theory in Saudi Stock Exchange
ABSTRACT
The main purpose of this study is to investigate the ability of two alternative models in finance, Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT), to explain the excess return of a portfolio of stocks in Saudi Stock Exchange (TADAWUL). The regression analyses were conducted on the portfolio, which consists of 54 listed and actively traded stocks in...

1. Dividend Growth ModelThe basic assumption in the Dividend Growth Model is that the dividend is expected to grow at a constant rate. That this growth rate will not change for the duration of the evaluated period. As a result, this may skew the resultant for companies that are experiencing rapid growth. The Dividend Growth Model is better suited for those stable companies that fit the model. Those that are growing quickly or that don't pay dividends do not fit the assumption parameters, and...

‘Portfolio theory and the capital asset pricing model (CAPM) are essential tools for portfolio managers and other stock market investors’
In order to be successful, an investor must understand and be comfortable with taking risks. Creating wealth is the object of making investments, and risk is the energy that in the long run drives investment returns.
PORTFOLIO THEORY
Modern portfolio theory has one, and really only one, central theme: “In constructing their portfolios investors need to...

Critical Analysis of the Relative Merits of the Capital Asset Pricing Model (CAPM) and the Fama and French (F&F) Three-Factor Model (TFM)
Introduction
During the 20th century, securities trading in the stock market has significantly increased. Since then, many studies have analysed the performance of managed portfolios and evaluated the way investors explain returns on stocks (Jagannathan and Wang, 1996). The most common theory used by managers and practitioners is known as the Capital...

Journal of Financial Economics 4 (1977) 129-176. (0 North-Holland
A CRITIQUE
OF THE ASSET PRICING
Publishing Company
THEORY’S
TESTS
Part I: On Past and Potential Testability of the Theory*
Richard ROLL*
University
of California,
Los Angeles,
l
CA 90024,
U.S.A.
Received June 1976, revised version received October 1976
Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a
mathematical equivalence between the individual return/beta’ linearity...

7-1 a. A portfolio is made up of a group of individual assets held in combination. An asset that would be relatively risky if held in isolation may have little, or even no risk if held in a well-diversified portfolio.
b. The feasible, or attainable, set represents all portfolios that can be constructed from a given set of stocks. This set is only efficient for part of its combinations.
c. An efficient portfolio is that portfolio which provides the highest expected return for any degree...

﻿Lecture 2: Pricing by Arbitrage
Readings:
Ingersoll – Chapter 2
Dybvig & Ross – “Arbitrage,” New Palgrave entry
Ross – “A Simple Approach to the Valuation of Risky Streams,” Journal of Business, 1978
Here we will take a first look at a financial market using a simple state space model. We first develop some structure then examine the implications of the absence of arbitrage.
Often in finance problems, uncertainty is characterized by the use of a set of random variables with a...

Journal of Accounting and Economics 31 (2001) 105–231
Capital markets research in accounting$
S.P. Kothari*
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, USA Received 22 November 1999; received in revised form 8 March 2001
Abstract I review empirical research on the relation between capital markets and ﬁnancial statements. The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of...

CHAPTER 11: THE COST OF CAPITAL
LEARNING GOALS:
1. Understand the key assumptions, the basic concept and the specific sources of capital associated with the cost of capital.
2. Determine the cost of long-term debt and the cost of preferred stock.
3. Calculate the cost of common stock equity and convert it into the cost of retained earnings and the cost of new issues of common stock.
4. Calculate the weighted average cost of capital (WACC) and discuss alternative weighing...

﻿Overview of Cost of Capital
Cost of capital is one of the factors in making long-term financial decisions. It the rate of return that a firm must earn on its investments to maintain its market value and attract needed funds. It is affected by business and financial risks, and is measured on an after-tax basis.
The cost of capital is an extremely important financial concept. It acts as a major link between the firm’s long-term investment decisions and the wealth of the owners as determined by...

International Business & Economics Research Journal – August 2012
Volume 11, Number 8
Capital Market Theories: Market Efficiency Versus Investor Prospects
Kathleen Hodnett, PhD, University of the Western Cape, South Africa Heng-Hsing Hsieh, PhD, CFA, University of the Western Cape, South Africa
ABSTRACT This paper reviews the development of capital market theories based on the assumption of capital market efficiency, which includes the efficient market hypothesis (EMH), modern...

Cost of Capital
Theory of cost of capital
Bottom of Form
Cost of capitaltheory attempts to explain whether a company's mix of equity and debt affects its stock price. Two types of cost of capitaltheory can be distinguished: the net operating income theory and the net income theory. In the net operating income theory, the mixture of debt and equity does not directly influence a company's financial value. Under the net income theory, the manner in which a corporation structures its...

What’s your real cost of capital?
By James J. McNulty, Tony D. Yeh, William s. Schulze, and Michael H. Lubatkin
Harvard Business Review, October 2002
Issue of the article: valuing investment projects
Number of pages: 12
Daniel Miravet Campos
Part 1. Executive summary
This article is fundamentally based on the exposition of a new method to calculate the cost of capital for a company (MCPM), to meet the inefficiencies of the current one (CAPM).
In valuing any investment project or...

Case Questions
Case #5 – Marriott Corporation: The Cost of Capital
1. Are the four components of Marriott’s financial strategy consistent with its growth objective?
2. How does Marriott use its estimate of its cost of capital? Does this make sense?
3. What is the weighted average cost of capital for Marriott Corporation?
a. What risk free rate and risk premium did you use to calculate the cost of equity?
b. How did you measure Marriott’s cost of debt?
4. If Marriott used a single...

9-207-056
JANUARY 28, 2007
MALCOLM BAKER
Multifactor Models
There are two parts to this exercise. The first is to evaluate the performance of four mutual funds.
And, the second is to estimate the cost of capital for two firms.
Benchmarking
Both parts of the exercise are about choosing an appropriate benchmark, either for evaluating past
investment returns or assessing a new project. Ideally, a benchmark should reflect the opportunity
cost, or the best alternative investment. If an investment...

CAPM is a model which enables investors to determine the expected return from a risky security. It observes the relationship between the risk of an asset (Mobil Oil) and its return. The model uses Beta as the main measure of risk. This model works under the following situations:
• In a perfectively competitive market where they are many price-takers’ investors, who have a small market share each.
• Investors behaviour is myopic
• Also investments included in the model are publicly...

Q1. Calculating Inputs
We chose assets from the 1990s, which was one of the most prolific decades in market history thanks in large part to the tech bubble. We chose to calculate average returns as 12x the monthly average return. This annualizes our return, which provides a better representation of returns by including more data points to perform analysis. The arithmetic calculation provides an impartial estimate of future return because it is always more than the geometric. All assets...

“The APT is derived from the premises that asset returns follow a linear returns generating process, and that in well-functioning financial markets, there will be no arbitrage opportunities. On the basis of these assumptions, one can show that there is an equilibrium linear relationship between the returns on risky assets and a small set of economy-wide common factors. While several macroeconomic variables do have some relationship with different risky assets, the APT postulates that the pricing...

1. On one half a page review what does our traditional finance framework and the CAPM model, for example, have to say about risk? What is it? How is it approached?
The traditional finance framework uses discounted expected future cash flow to determine the NPV of the project. The amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. People are rational and adverse to risk and need incentive to accept risk. The incentive in finance comes...

Arbitrage Pricing Theory
The fundamental foundation for the arbitrage pricing theory is the law of one price, which states that 2 identical items will sell for the same price, for if they do not, then a riskless profit could be made by arbitrage—buying the item in the cheaper market then selling it in the more expensive market. This principle also applies to financial instruments, such as stocks and bonds. For instance, if Microsoft stock is selling for $30 on one exchange, but $30.25 on...

Summary of the Arbitrage Pricing Theory (APT)
The APT model was developed as an alternative to the CAPM. Like the CAPM, this model provides implications for the relationship between expected returns and risk on securities. However, the model differs from CAPM in its assumptions, its implications, and in the way that equilibrium prices are reached. • Assumptions: The CAPM model assumes that all investors are risk-averse utility maximizers. In other words, all investors solve the investment...

﻿ ARBITRAGE PRICING THEORY ( APT )
Originally developed by Stephen A. Ross.
The CAPM predicts that security rates of return will be linearly related to a single common factor : ----- the rate of return on the market portfolio. The APT is based on a similar approach but assumes the rate of return on a security to be sensitive to a number of factors.
Market equilibrium is driven by individuals eliminating...

9-204-109
REV: OCTOBER 23, 2006
MIHIR DESAI
Globalizing the Cost of Capital and Capital Budgeting at AES
In June 2003, Rob Venerus, director of the newly created Corporate Analysis & Planning group at The AES Corporation, thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public, AES had become a leading independent supplier of electricity in the world with more than $33 billion in...

Marriott cost of capital
Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation.
2) Evaluate Marriott's use of company cost-of-capital rate for the individual divisions.
Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd.
For the weights of debt and equity (We and Wd), the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case.
Cost...

﻿CHAPTER 14
The Cost of Capital for Foreign Investments
EASY (definitional)
14.1 The ________ for a given investment is the minimum risk-adjusted return required by the shareholders of the firm for undertaking that investment.
a) cost of equity capital
b) systematic risk
c) all-equity beta
d) weighted average cost of capital
Ans: a
Section: The cost of equity capital
Level: Easy
14.2 One function of the cost of capital is to _______ for the firm.
a) determine the debt to equity...

﻿Nike, Inc.: Cost of Capital
Case 15
Financial Administration
FINC 5713-180
Team 1
Fall 2013.
October 8, 2013.
Introduction
Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shares from Nike, inc even if it’s share price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the...

Marriott Case
1. What is the WACC for Marriott Corporation?
Cost of Debt
Tax Rate
We determined this number by taking income taxes paid/EBITDA = 175.9/398.9 = 44.1%
Return on debt
There are two clear components of debt: fixed and floating.
In order to get the fixed debt rate we took the interest rates on fixed-rate government securities and added the...

﻿Case Analysis of Nike, Inc.: Cost of Capital
Apparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) because her assumptions such as Revenue Growth Rate, COGS / Sales, S &A / Sales, Current Assets / Sales, and Current...

Marriot Corporation: Cost of Capital
By Xue Fan
Background
Marriott Corporation began in 1927 with J. Willard Marriott’s root beer stand. Over the next 60 years, the business grew into one of the leading companies in industry in United States. In 1987, Marriott’s sales grew by 24% and its return on equity stood at 22%. Sales and earnings per share had doubled over the previous 4 years, and the company strategy was aimed at continuing this trend.
Marriot Corporation had three major lines...

Introduction
Part 1 of this paper will look at the three most common models used for estimating the rate of return for a given company; dividend growth, Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT).
The board of directors for Apple Computer Corporation will receive this report, and based on the findings and analysis included, Apple will be given a recommendation as to the cost equity model they should implement to estimate their future rate of returns.
This report...

﻿I. Introduction
Kimi Ford, a portfolio manager for the mutual-fund management group NorthPoint, was reviewing the financials of Nike Inc. to consider buying shares for the NorthPoint Large-Cap Fund that she managed. A week prior, Nike Inc. held an analysts’ meeting to share their 2001 fiscal results and develop a strategy to revitalize the company.
II. Background of Firm
Nike’s revenues since 1997 had grown from $9 billion, while net income had fallen $220 million. A study written by...

Toyota Cost of Capital Case:
General Methodology
We used the following framework to do the calculations for all the companies. Afterwards we will discuss their implications:
To estimate the cost of equity (RE) we used the following CAPM model:
RE = RF + βE (RM-RF)
whereby,
Market Premium = RM – RF = 6% (Given in case)
RM = Return for S & P 500 (a market return that takes into account systematic risk associated with the market place where our company is traded, NYSE)
Risk Free...

Case #3 “Marriott Corporation” The Cost of Capital”
What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions?
– What risk-free rate and risk premium did you use to calculate the cost of equity?
– How did you measure the cost of debt?
– How did you measure the beta for each division?
Solution
What risk-free rate and risk premium did you use to calculate the cost of equity?
– Risk-free rate proxy
The...

Capital Valuation Paper
Team A
Blake Reimert, Crystal Harris
Raquel Young, and Tambra Williams
FIN/419
Thomas Mitchell
University of Phoenix
November 11, 2010
Capital Valuation Paper
Valuation is the process of estimating the potential market value of an asset or a liability. Valuations can be done on assets, such as investments in securities like stocks, options, or business enterprises. Valuations can also be done on intangible assets such as patents or trademarks or on...

﻿
The Cost of Capital
Benedict Amanor, Yolanda Brown-McCutchen, Edith Compean, Angel Longino
and Melissa Shea-Brooks
FIN/571
May 18, 2015
William Stokes
The Cost of Capital
In our fifth week of understanding the practices of Corporate Finance, we reviewed the Cost of Capital video. This video provided information on Pfizer, a researched based pharmaceutical company that makes products to help face health care challenges. Our goal is to highlight the cost of capital as...

1) Executive Summary
Marriott needs to calculate hurdle rates which will be used in its investment project selection. The company chooses to use cost of capital as its hurdle rate. Since the company has three business divisions and the cost of capital in each division varies and differs from that of Marriott as a whole, each division needs to have its own hurdle rate. The reason behind this practice is the company's strategy which focuses on growth. Using a single hurdle rate for the whole...

Introduction and Background
Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. In July 2001, Ford considered buying shares of Nike, Inc., the well-known athletic shoe manufacturer. It would be prudent of Ford to base her assessment on Nike’s financial reports for 2001. Around the same time, Nike held an analysts’ meeting to disclose those financial results. They also addressed ways to revitalize the company, since share price was beginning to decline and...

Introduction
Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market.
Ford has done a significant amount of research through analysts’...

﻿MNQ Company's pretax cost of debt is 7 percent. Refer to the data
on the first and second tabs of the spreadsheet
SU_MBA6010_Final_Project_Information.xls provided in the Doc
Sharing area. For this part of the assignment only, assume that MNQ Company's book value capital structure weights equal its market value capital structure weights.
Estimate the company's cost of capital for 2008.
Submit your answers in a 3- to 5-page Microsoft Word document and
your calculations in a Microsoft...

Case Study of Cost of Capital at Ameritrade
1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision?
CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if...

Executive Summary
Wanting to add Nike’s share to her portfolio, Kimi Ford asked her new assistant, Joanna Cohen, to estimate Nike’s cost of capital. Cohen, later, came up with the cost of capital of 8.4% that was contradicted to Ford’s cost of capital of 12%.
This report points out flaws of Cohen’s assumption and recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation, we will use CAPM, the dividend discount model (DDM), and the earnings...

FIN – 502, dR. GEORGE gALLINGER |
Case Analysis – Marriott |
Detailed - Individual Assignment |
|
Ankur Sharma |
Evening Accelerated MBA - T/Th – Class of 2011 |
W P Carey School of Business, Arizona State University |
The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is...

The Evolution of Finance: A Review of Peter Bernstein's Capital Ideas
The world of finance is ever-changing. Over the last century, the modern form of economic and financial theory as we see today has been developed and shaped by the minds of many. What we have come to know and accept as fact today were seemingly unheard of nearly fifty years ago. It is with the endless efforts of these like-minded scholars that gives us the opportunity to appreciate the tools and fundamentals we used today to...

Cost of Capital at Ameritrade
What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on investment is greater than the cost of capital. Therefore, the main factors that Ameritrade management should consider are the expected return on investment for the project, and how this compares to the...

Executive summary
In this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC).
In our analysis, we examine why WACC is important in decision making and we show how WACC for Nike Inc....

Case: Lex Service Plc-Cost of Capital
Objective:
Lex service Plc sold its various subsidiaries and other assets in between 1991 and 1993 which provides more than £340 million of funds. To reinvest this huge amount of funds it evaluates many investment options and acquisitions. To evaluate the worth of new investments, Lex uses discounted cash flow analysis. In order to employ DCF analysis method, discount rate or cost of capital required. Now the question is arises ‘what should be real cost of...

Starbuck’s CAPM and Sources for Capital
TUI UNIVERSITY
Module 3 SLP
FIN301: Principles of Finance
Dr. Sharifzadeh
August 31, 2011
Starbuck’s CAPM and Sources for Capital
By definition beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns (Investopedia,...

1. Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital.
Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used...

Executive Summary
The case, Marriott Corporation: The Cost of Capital (Abridged), concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs, the Vice President of Finance of Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating...